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FRM Part II · FRM Exam Part II · Capital Structure in Banks

A bank is subject to a 4.5% minimum CET1 requirement, a 2.5% capital conservation buffer, a 1.0% G-SIB surcharge and a 1.0% countercyclical buffer. Its CET1 ratio is 8.0%. Which of the following best describes the bank's position?

The bank meets the 4.5% minimum but sits inside the buffer range. Total CET1 needed to avoid limits is 4.5% plus buffers of 4.5%, which is 9.0%. At 8.0% it faces automatic restrictions on dividends, buybacks and discretionary bonuses.

  1. AIt meets the minimum but is in the buffer range and faces automatic distribution restrictionsCorrect
  2. BIt breaches the minimum CET1 requirement and must be closed
  3. CIt is fully compliant with all requirements and has no distribution limits
  4. DIt is subject to restrictions only if its leverage ratio falls below 3%

Explanation

The combined buffer requirement is 2.5 + 1.0 + 1.0 = 4.5%, so the CET1 level at which distribution limits end is 4.5 + 4.5 = 9.0%. At 8.0% the bank is above the 4.5% minimum but inside the buffer range, so dividends, buybacks and bonuses are constrained. It is not a minimum breach, and the restrictions do not depend on the leverage ratio.

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